Written evidence submitted by the British
Bankers' Association
1. The British Bankers' Association (BBA)
is the leading association for the UK banking and financial services
sector, speaking for over 200 banking members from 60 countries
on the full range of UK and international banking issues. In
addition, 40 professional firms are also associated with us.
Our members, whilst predominately banks, engage in activities
which range widely across the financial spectrum, encompassing
services and products as diverse as primary and secondary securities
trading, insurance, investment advice and wealth management, custody,
as well as conventional and non conventional forms of banking.
2. The BBA welcomes the opportunity to provide
written evidence to the Treasury Committee on the fundamental
principles of tax policy.
EXECUTIVE SUMMARY
3. The BBA considers that the key principles
which should underlie tax policy are that the system should be:
statutory; certain; simple; easy to collect and to calculate;
properly targeted; constant; subject to proper consultation; regularly
reviewed; fair and reasonable; competitive; predictable; and consistent.
4. The BBA is concerned that increased taxation
on the banking sector will inhibit growth.
5. The BBA considers that the Government
should, as far as possible, minimise costs on businesses and the
burden of complying with the tax system.
TREASURY SELECT
COMMITTEE QUESTIONS
What are the key principles which should underlie
tax policy?
6. In the BBA's response to HM Treasury
(HMT) and HM Revenue and Customs' (HMRC) paper "Tax policy
making: a new approach", we stressed that predictability
and consistency are critically important features of a stable
and attractive tax regime.
7. The increasing politicization of aspects
of the fiscal regime has created a tax policy that is sometimes
populist, reactive and lacking a principled basis. Tax reform
proposals should rather be underpinned by solid research and analysis,
culminating in an evidence-based and analytically sound case for
reform. The rapid change and volatility in bank taxation over
the last three years has caused significant concern about the
predictability of the UK's tax policy. Indeed, predictability
was flagged in a report[63]
prepared for the City of London Corporation by CRA International
as "the most important factor in judging competitiveness,
but also the one on which the UK got its worst score and fared
the worst in comparison to other countries".
8. Consistency has also been an issue in
UK tax policy, with policy statements being made indicating a
desire to make the UK more attractive internationally whilst unilateral
action is taken imposing uncompetitive new measures. Such inconsistency
sends a very mixed and confused message and betrays the incoherence
of certain aspects of the UK's tax policy.
9. More generally, the BBA concurs with
the views outlined by the Tax Faculty of the Institute of Chartered
Accountants in England and Wales in its discussion paper, Towards
a Better Tax System,[64]
that the tax system should be:
(a) Statutory: tax legislation should be enacted
by statute and subject to proper democratic scrutiny by Parliament.
(b) Certain: in virtually all circumstances the
application of the tax rules should be certain. It should not
normally be necessary for anyone to resort to the courts in order
to resolve how the rules operate in relation to his or her tax
affairs.
(c) Simple: the tax rules should aim to be simple,
understandable and clear in their objectives.
(d) Easy to collect and to calculate: a person's
tax liability should be easy to calculate and straightforward
and cheap to collect.
(e) Properly targeted: when anti-avoidance legislation
is passed, due regard should be had to maintaining the simplicity
and certainty of the tax system by targeting it to close specific
loopholes.
(f) Constant: Changes to the underlying rules
should be kept to a minimum. There should be a justifiable economic
and/or social basis for any change to the tax rules and this justification
should be made public and the underlying policy made clear.
(g) Subject to proper consultation: other than
in exceptional circumstances, the Government should allow adequate
time for both the drafting of tax legislation and full consultation
on it.
(h) Regularly reviewed: the tax rules should
be subject to a regular public review to determine their continuing
relevance and whether their original justification has been realised.
If a tax rule is no longer relevant, then it should be repealed.
(i) Fair and reasonable: the revenue authorities
have a duty to exercise their powers reasonably. There should
be a right of appeal to an independent tribunal against all their
decisions.
(j) Competitive: tax rules and rates should be
framed so as to encourage investment, capital and trade in and
with the UK.
10. It is disappointing that such little progress
has been made in taking the UK tax system further towards the
objectives set by the ICAEW over a decade ago. The BBA would urge
the Government, HMT and HMRC to make a categorical statement of
support for these principles.
How can tax policy best support growth?
11. New taxes, such as the Bank Levy or a Financial
Activities Tax, add to the incremental costs currently being faced
by banking groups, such as increased capital and liquidity requirements.
Measures that impose new costs on financial institutions need
to be borne between shareholders, employees and customers and
place pressure on the flow of credit to businesses and households.
Such outcomes are not generally supportive of growth.
12. The OECD in its November 2010 Tax Policy
Study No. 20, "Tax Policy Reform and Economic Growth",[65]
analysed factors contributing towards or impinging on economic
growth. It noted that:
"A country's rate of economic growth depends
on many factors including the rate of economic growth of its main
trading partners, the country's innovative capacity, the availability
of venture capital, the amount and type of investment, the degree
of entrepreneurship, the skills level and the mobility of the
workforce, the flexibility of the labour market, the degree to
which individuals have an incentive as well as an opportunity
to participate in the labour market, the labour costs for employers
of hiring workers, the availability of qualified workers, the
administrative burden on businesses, product market regulations,
the economic infrastructure as well as the legal certainty and
the confidence level of consumers and businesses.
The tax system plays a crucial role as it is likely
to impinge on many of these factors. The level of the taxes that
are raised, the tax mix, the quality of the tax administration,
the complexity of the tax rules and the tax compliance costs,
the certainty and predictability for households and businesses
of the taxes that have to be paid, the network of tax treaties
as well as the specific design characteristics of individual taxes
including the availability of tax incentives and the broadness
of the different tax bases can have an impact on the country's
rate of economic growth."
13. Finally, the report also concluded that "In
general, a growth-oriented tax system may want to create as little
obstacles as possible to the growth of economic activities. This
implies also that tax systems may not want to discourage …
the possible inflow of high-skilled and other foreign workers".
We do not find the government's imposition of a permanent immigration
quota constructive in this regard.
14. The immigration cap will have a direct effect
on UK trade and business, not only limiting the supply of available,
skilled labour that UK businesses can access but also limiting
the number of migrant investors and entrepreneurs coming to the
UK.
To what extent should the tax system be structured
to support other specific policy goals?
15. The tax system should not be structured to
support specific policy goals other than economic growth and sound
public finances.
16. The BBA considers that fiscal policy is too
imprecise a lever to successfully or predictably drive a particular
behavioural response. Furthermore, the use of tax incentives
and disincentives may result in unintentional consequences, such
as an adverse effect on economic growth.
How much account should be taken of the ease and
efficiency with which a particular tax can be imposed and collected?
17. The BBA supports the Government's commitment,
in "Tax policy making: a new approach",[66]
to "a simpler tax system" which would "ensure that,
as far as possible, reforms minimise transitional costs on business
and the burden of complying with the tax system."
18. Both the Bank Levy and Bank Payroll Tax required
extensive consultation and discussion, necessitated by the complexity
and confusion, within industry but also within government, surrounding
both measures. Complexity adds to the costs of existing taxpayers
and acts as a disincentive to prospective investors to the UK.
19. The costs of compliance with the tax regime,
for both the tax administration and the taxpayer, should be proportionate
to the amounts collected. The same also holds for costs incurred
by intermediaries including banks whether in terms of their acting
as collecting agents or the providers of information. Where possible
the Government should seek to utilise established mechanisms and
channels to avoid creating additional burdens with concomitant
costs.
Are there aspects of the current tax system which
are particularly distorting?
20. The BBA has consistently flagged the different
treatment between foreign branches and subsidiaries as a particularly
distortive effect of the current tax system. We are pleased to
see that this anomaly is now being addressed.
21. While we welcome the consultation on branch
taxation, we remain concerned that the proposals, as they stand,
may well end up being useful only to structured arrangements rather
that to genuine business as a result of a move away from the expected
exemption with loss relief and clawback. Therefore, rather than
creating a world class competitive regime for the UK we risk ending
up with something that is rather less useful.
22. The BBA is also pleased that the distortive
effects of the Controlled Foreign Companies regime are being addressed
through the CFC review, although we note that this workstream
has been problematic and a satisfactory conclusion is not assured.
January 2011
63 Taxation of the Financial
Services Sector in the UK Predictability and Competitiveness,
City of London Economic Development, October 2010,
http://217.154.230.218/NR/rdonlyres/E3CEF4F7-479B-46B4-AB93-29DF5F673B53/0/TaxationofFinancialServices.pdf Back
64
Taxguide 4/99, Towards a Better Tax System, A discussion paper
by the Tax Faculty of the Institute of Chartered Accountants in
England and Wales published in October 1999, http://www.icaew.com/index.cfm/route/118111/icaew_ga/doc
Back
65
Tax Policy Study No. 20 - Tax Policy Reform and Economic Growth,
November 2010, http://www.oecd.org/dataoecd/34/49/46617652.pdf Back
66
"Tax policy making: a new approach", BBA, September
2010 http://www.bba.org.uk/download/5633 Back
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